Putin signs decree to service Eurobonds if default looms

© Reuters. Russian President Vladimir Putin moderates a meeting with members of the Security Council via video link on June 22, 2022 in Moscow, Russia. Sputnik/Mikhail Metzel/Kremlin via REUTERS

LONDON (Reuters) – Russian President Vladimir Putin signed a decree on Wednesday to establish interim procedures aimed at meeting Russia’s foreign debt obligations as the country teeters on the brink of default.

The Kremlin has repeatedly said Russia has no reason to default on its debt. The government has the funds to pay, but cannot pay interest to bondholders because of sanctions, the report said, accusing the West of trying to push Russia into an artificial default.

According to the order, Putin has given the government 10 days to choose banks to handle Eurobond payments under the new scheme, a sign that Russia will consider its debt obligations fulfilled when paying bondholders in rubles.

The failure to repay foreign debt as the West imposed sanctions on Russia for what it called a “special military operation” in Ukraine brought it closer to the largest international bond default since the Bolshevik Revolution more than a century ago.

“The obligations of the Eurobond of the Russian Federation executed in rubles are deemed to have been duly performed if the value of the obligations in the Russian Federation is equal to the foreign currency obligations,” the decree said.

According to the decree, the exchange rate will be based on the exchange rate in the Russian domestic currency market on the day of payment.

Russia’s $40 billion in outstanding hard currency bonds has become a flashpoint for Western capital to impose financial sanctions and Moscow to take countermeasures.

Despite severe restrictions, Moscow has so far managed to avoid default by finding new ways to move funds and devising workarounds, paying international holders the equivalent of seven different eurobonds since the war began. payments.

“They’re trying to move the ball from their own pitches to investors’ pitches,” said Tatiana Orlova, chief economist at Oxford Economics.

“What they are doing is setting up a mechanism for the Treasury Department to pay in rubles to banks that are not subject to Western sanctions,” she said, adding that it was unclear whether bondholders would agree to the plan.

Defaults are likely to occur around the end of June.

Russia was due to pay two interest payments on May 27, at $71.25 million and 26.5 million euros ($27.98 million). It has a 30-day grace period to pay.

Russia said it had moved cash to a state clearing depository, but sanctions could prevent further funding.

To avoid default, funds must be paid into bondholders’ accounts in the correct currency within a specified time frame.

Russia’s finance ministry said last week that Russia will pay rubles for its euro bonds, which can then be exchanged for foreign currencies.

Analysts expect Putin’s decree to do little to change the country’s trajectory towards default on international bonds, which are issued under British law.

“Putin is not sure when/if a default will occur,” said Tim Ash, a strategist at BlueBay Asset Management. “He is not sure whether the Eurobonds have been paid in the form required by the contract.”

(1 USD = 0.9470 EUR)

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